Transfer of Tenant Deposit for an Investment Short Sale Can Be Tricky

My last short sale closing for the year was a doozie. It moved along fairly well until we got to short sale approval. The place was immaculate. I knew it would sell fast. Besides, the sellers had remodeled their kitchen based on my kitchen remodel in Land Park, if you can believe that. They found my blog online in which I described how to remodel a kitchen in 10 days, and liked it so much they used the same materials and suppliers. Big bonus to them, I suspect, was the fact that I am also a Sacramento short sale agent, although, at the time, I bet they did not think they would ever have to utilize my services.

Fast forward a few years. The first buyer offered all cash and more than list price but -- probably based on their agent's ill advice -- refused to release the earnest money deposit. We could not accept such an offer. Supposedly, these investors owned other units in this Sacramento condo complex. Would have been a sweet deal for them, but they did not want to cooperate with us.

That was a shame.

We accepted a second offer that came from an owner occupant, one of those CHDAP loans. The problem with CHDAP and an FHA loan is they tend to move at their own pace. Some mortgage companies seem to be able to push them along, but not the one we were saddled with. They could not close in the 30 days given to us by the seller's lender. The borrower's lender pleaded for an extra week. I got them two weeks just to be safe, and the lender was still fumbling around at the 11th hour. It was touch and go.

One of the sticking points with this short sale was taking possession with a tenant still in place. I've closed other short sales on tenant-occupied properties and not had a problem. Typically, we leave the tenant deposits out of the escrow. Buyer's agents don't seem to think about them, and I don't draw attention to the fact. We do, however, obtain a tenant estoppel so the buyer is informed.

There ought to be a standard procedure but anybody who does short sales will tell you a seller depositing funds into escrow to transfer security deposits can be a red flag to the short sale bank. In California, we've got SB 458, which places restrictions on sellers' contributions. Plus, short sales are sold "as is." A buyer could very well be held responsible for refunding a tenant's deposit.

On top of this, there can be no secret agreements on most short sales between the sellers and the buyers due to the arm's length agreements. So, a seller can't really hand funds to the buyer outside of escrow without disclosing this to the bank. It's a sticky wicket. My solution, or at least the one that has been working for me, is for the seller to either refund the deposit to the tenant or let the buyer assume responsibility. Obviously, as a listing agent, I prefer the latter. But I can see why a buyer might object.

If you are an agent representing a buyer or maybe an investor who wants to buy a short sale occupied by tenants, this is an issue you should probably discuss prior to writing an offer. If you're selling an investment short sale, you will want to protect yourself.

Today, we are transferring hotels in Hawaii, embarking on the last leg of our vacation. We are going to my dream hotel. Leaving the goats at the entrance to this one behind. Goodbye 2011, hello 2012.

Photo: Elizabeth Weintraub